TriVest: the price of oil will rise faster than you think. It always happens

Currently, the oil market is dominated by panic, but many people forget that behind strong collapse of prices for black gold was soon followed by a powerful rebound. In our opinion, the main cause of the current downtrend is that after the 2008 crisis in the United States launched a program of quantitative easing, while interest rates were reduced to zero, resulting in local shale companies have a large number of cheap capital, and immediately launched into his work. This led to an increase in supply 4 million barrels per day at a time when they had no demand. Looking at this, Saudi Arabia and its OPEC partners lost patience and began to fight to preserve its market share by increasing the offer by another 1.5 million barrels per day in the period from mid 2014 to mid 2015. Prices have quickly reacted to the increase in the imbalance and collapsed, even before the news of the return to the market of Iran. However, this situation will not last forever.

Specificity of shale wells is that for the first year or two, they give the maximum amount of oil, then the volume of production drops by 75-80% and then stabilize at these low levels. They require constant drilling and reinvesting large amounts of capital to save the same amount of production, let alone increase it. According to our calculations, at an oil price of $ 50 US manufacturers spent about 80% of revenue to service debt, and now, when oil traded below $ 30, the situation became even worse. Dramatically reduced the number of drilling rigs, and when we finally see the delayed effect of these developments, the rate of decline in production and the scale will surprise many. Then you can do little to quickly increase production volumes, given the massive layoffs and quickly wears out the equipment.

- For the fall in oil prices by 79% in 2008-2009, followed by an increase of 274%;

- The fall in oil prices by 59% in 1996-1998 was followed by an increase of 244%;

- The fall in oil prices by 66% in 1990-1993 was followed by an increase of 90%, and

- The fall in oil prices by 62% in 1985-1986 was followed by an increase of 273%.

Note. TriVest Wealth Counsel - a private investment company based in Alberta, Canada.

19 January 2016

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